Increased Interest Rate Adds Revenue to Insurers, Bearish Stock Market Widens Provisioning

Kathmandu: Due to lack of liquidity, insurance companies have directly benefited when banks and financial institutions(BFIs) announced higher interest rates to attract deposits.

The positive impact of rising interest rates will be reflected in the financial statements of non-life, life and reinsurance companies in the fourth quarters financial report. An increase in interest income will be a big boost for start-up insurance companies like Himalayan Reinsurance(Himalayan Re), which had underwriting losses in the third quarter.

Due to lack of liquidity, the decline in share prices in the secondary market has become a headache for insurers that are directly benefiting from rising interest rates. The possible provisioning for the losses of secondary market may result lower profit for the insurers.

It will be difficult for a company like Union Life Insurance, which has high operating expenses, to make a profit only from interest income this time. For the company that has shown profit in the financial statements from the returns obtained from the investment made in the stock market, this time the obligation to arrange for possible losses will affect the profit. At the end of last Chaitra, the profit of Union Life Insurance was Rs. 27.2 million. Nepal Life Insurance also had a huge loss in the third quarter due to provisioning against loss of stock market. Since there is no improvement in the stock market, the risk management will have to be continued. By the end of last Chaitra, Nepal Life has suffered a loss of Rs 194.45 million. NLIC had provisioned above Rs.52.82 for the possible loss, which had affected its profit.

Not only the insurance industry but organizations with large amounts of cash funds such as Employees Provident Fund, Citizen Investment Fund, Social Security Fund, Nepal Army Welfare Fund, Nepal Police Welfare Fund and Armed Police Welfare Fund, Deposit and Credit Protection Fund and to some extent Health Insurance Board are also included in the list of beneficiaries from increasing interest rates.

According to the investment related data published by the Insurance Board, up to the third quarter, life, non-life and reinsurance companies have invested above Rs.3.80 trillion in fixed deposits of BFIs of A, B and C categories. Due to relatively safe and stable rate of return, almost 80 percent of the total investment is concentrated on term deposits.

Due to the increase in interest rate, it will help to make up for the loss caused by the fall in the interest rate of deposits during the Covid19 epidemic last year. Some life insurance companies have invested a part of the insurance fund in term deposits of 5 to 20 years, grabbing the opportunity for high interest rate. Earlier the interest rate was above 12 percent for fixed deposit.

However, due to the increase in interest rate, when the production cost is high, the effect of inflation will also decrease the savings capacity of the common people, so its cyclical effect will appear directly in the insurance sector too.

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